Insights

It is often the case that dispute resolution clauses in Construction Contracts are an afterthought. Receiving due receives attention only when the parties reach the point of dispute. Unfortunately, it is often the case then at that important juncture that the contracting parties find that the process set out in their contract is unhelpful, unworkable, or sets out a procedure that is open to abuse by the other party.

Notwithstanding the recent release of the 2017 suite of contracts, FIDIC’s 1999 Edition suite of construction contracts (the 1999 Editions) remain the most common form of construction contracts used in the Middle East region. The dispute resolution terms set out in sub-clauses 20.2-20.8 of these contracts have often been criticized as a procedure that can be manipulated to bring about delays and failing to encourage the parties to actively try and resolve their dispute. Such criticism seems justified when we see circumstances arise where parties follow the FIDIC procedure for dispute resolution only to see more than 6 months pass[1] before the parties reach the point of reference of their dispute to arbitration.

Naturally the parties will always have a commercial and/ or operational incentive to settle a dispute in order to avoid the cost and uncertainty of arbitration. The 1999 Editions do see some amicable settlements reached. The urgency, however, of reaching a settlement will vary in many instances. For example, where a Contractor is seeking payment of a substantial claim, the Employer will have a significant incentive to delay the process, and the Contractor will continue to suffer each day that the matter remains unresolved bringing pressure to bear. Such pressure can be enough to force parties to settle for substantially less than may have been legally and contractually entitled to.

FIDIC seeks to address this criticism in the release of their 2017 Edition contract forms. Through a discrete but significant change, FIDIC has shifted the power balance in such disputes, and given real power to the Dispute Avoidance and Adjudication Board, otherwise referred to as the DAAB, appointed by the parties. The DAAB is an enhancement of the 1999 Editions’ DAB mechanism. The DAB being an alternative dispute resolution procedure which is frequently deleted out of the contracts and replaced with mediation or expert procedures instead.

Like the DAB under the 1999 Editions, the procedure to empanel the DAAB is quite similar[2] and they still have an 84 day period to adjudicate on the matter. However, sub-clause 21.4.3 provides that the decision of the DAAB “shall be binding on both Parties, who shall promptly comply with it whether or not a Party gives a [Notice of Dissatisfaction] with respect to such decision”.

The 2017 Editions further provide that “[i]f the decision of the DAAB requires a payment of an amount by one Party to the other Party” such amount “shall be immediately due and payable without any certification or Notice”[3]. The consequence of this inclusion by FIDIC is significant and will have major impact on how the parties deal with disputes under FIDIC contracts.

Firstly, the commencement of proceedings before the DAAB now has real significance. In the past, the procedure could be dismissed by the parties and exploited as a delay tactic. This was because they each knew that whatever the DAAB decided, a simple ‘Notice of Dissatisfaction’ would render the decision void and only send the parties into a 56 day negotiation period. Knowing they could rely on this grace period, or fearing their opponent was intending to rely on this, would see parties failing to invest time and resources into this initial stage of the dispute resolution proceedings.

With an increased importance now placed on the outcome of the DAAB’s decision, the parties will need to give careful consideration to the members they appoint to the DAAB. They each must seek to appoint members who are genuinely technically competent and experienced. Members who they believe are likely to make the correct decision when presented with a dispute. This hopefully will lead to the parties adhering more acceptingly to the decision delivered by the DAAB rather than immediately lodging a ‘Notice of Dissatisfaction’ as a strategy method.

Given that the decision of the DAAB will have an immediate impact, the parties should be more motivated to try and resolve the dispute informally. FIDIC’s addition of clause 21.3 (Dispute Avoidance) is therefore significant, as it enables the parties to obtain informal and impartial assistance from the DAAB to try and resolve the dispute before adjudication is necessary. As noted above, where the parties appoint respected experts to the DAAB, their informal assistance may be hard to disregard and therefore invaluable.

Finally, the DAAB’s adjudication must now be treated seriously by the parties. The parties are therefore more likely to present the best information possible to support their position in the dispute, building greater credibility into the adjudication process.

With greater credibility in the process, it is expected that even when the decision has not been favorable, parties are more likely to accept it rather than use it as a strategic tool. The expectation that an arbitration will produce a different result if you felt that your case was properly argued before a respected panel of experts should no longer be a legitimate concern. Furthermore, the motivation to proceed to arbitration may particularly be lessened when you have already (as required by the contract) given effect to the DAAB’s decision.

The procedure set out in the 2017 Contracts, whilst not quite revolutionary, is certainly a welcome enhancement to a previously much aligned procedure. Not only does it bring dispute avoidance to the fore as a driver and a priority, but it seems more likely to encourage the parties to work together to settle amicably. Where this does not occur, we expect more parties to accept the decision of the DAAB rather than electing to proceed to arbitration.

Query whether the DAAB procedure is ripe for use in Middle East contracts and disputes? The image of the DAB from the 1999 Editions as a mini-arbitration process before a full blown arbitration is not going to go away easily. Many parties, particularly in the public sector, still require the comfort of a final arbitration award. It will take time for the 2017 Editions to come into play in the region generally. Anything that seems to shift power seemingly away from the Employer to the Contractor in disputes relating to claims and payments, whether to achieve more balance or not, is going to be viewed with some skepticism. Until parties can experience the real benefits of early dispute avoidance and swift dispute resolution the new DAAB is unlikely to be widely adopted. But to experience that you have to actually use it. That means there is a role at legal, procurement and project management levels in encouraging parties at the pre-contract stage to incorporate a procedure which may prove useful down the line when claims and disputes arise.

The alternative is construction contracts involving many Employers and Contractors who are not yet ready to adopt a proactive approach to claims and disputes avoidance. They will endeavor to keep any contractual upper hand they perceive themselves to have, sticking to procedures that they are more comfortable with such as amended forms of the 1999 Editions, which often involve long and unproductive periods for amicable settlement and early dispute resolution discussions.

[1] This period is roughly calculated as being 28 days for the appointment of the DAB (clause 20.2), 84 day adjudication period (clause 20.4), 28 day notice of dissatisfaction period (clause 20.4), 56 day amicable settlement period (clause 20.5).

[2] Although not covered in this paper, it is hoped that parties would take advantage of the Dispute Avoidance provision of clause 21.3 and the parties would not suffer a delay in appointing a DAAB as is usually the case under the 1999 contracts.

[3] The one exception to immediate payment is the provision of sufficient security, which the DAAB has the discretion to require if there is a reasonable concern that the receiving party would not be able to repay such amount if the DAAB’s decision was overturned at arbitration.

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